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Italian senate passes unpopular austerity plan

The Italian senate on Wednesday approved the government's controversial austerity programme. The plan, which will now pass to the Chamber of Deputies, is expected to be approved in the next few days.

REUTERS - The Italian Senate on Wednesday approved the government’s widely criticised austerity programme aimed at staving off financial crisis in a vote of confidence called by Prime Minister Silvio Berlusconi.

The plan, which has been radically overhauled on several occasions under pressure from the European Central Bank and the European Union, now passes to the Chamber of Deputies, where Berlusconi has a slimmer but still stable majority.

It is expected to be definitively approved in the next few days.

Late on Tuesday, the government yielded to growing calls for the package to be reinforced, increasing value added tax, extending the retirement age for women in the private sector and introducing a tax on very high earners.

The Senate approved the plan, which aims to balance the budget in 2013, with 165 votes in favour and 141 against.

After weeks of criticism over the government’s wavering on the package, Berlusconi called the confidence vote to put an end to any further discussion in the Senate. He would have been forced to resign had he lost.

Police used tear gas and baton charges to disperse demonstrators protesting against the measures outside the Senate while vote took place.

After the latest revisions the mix of tax hikes and spending cuts amount to more than 54 billion euros over the next three years, the Treasury says.

Italian bond yields fell back early on Wednesday after Germany’s constitutional court rejected a lawsuit aimed at preventing Berlin, the euro zone’s effective paymaster, from participating in bailouts for struggling governments.

International criticism has rained down on Berlusconi’s centre-right government for the chaotic way in which it has responded to demands from the ECB for clear and concrete plans to cut its mountainous public debt.

As the crisis has continued, Berlusconi’s own position has come under growing pressure with Italian President Giorgio Napolitano, European partners, unions and Italy’s business leaders all voicing increasingly direct criticism.

Berlusconi won’t go

Berlusconi has repeatedly rebuffed calls to step down and Defence Minister Ignazio La Russa dismissed suggestions the premier should make way for a non-partisan government of specialists who could steer Italy through the crisis.

“Governments are appointed by voters, you don’t make them as though you were in a kitchen,” he said.

Italy, the euro zone’s third largest economy, has been at the centre of the debt crisis since the start of July when markets began to doubt its commitment to cutting its 1.9 trillion debt mountain.

Only intervention by the ECB to buy Italian bonds has kept its borrowing costs from soaring out of control and destabilising the entire euro zone. But the ECB has warned that its support could not be taken for granted.

Berlusconi’s centre-right coalition has been deeply split over whether to raise taxes or hit pensions with Economy Minister Giulio Tremonti, once seen as the guarantor of financial stability, appearing increasingly isolated.

Tuesday’s decision to raise VAT represented a particular defeat following his long opposition to the move, but he had failed to come up with any alternative funding source.

According to a technical assessment provided by the Treasury, the one percentage point hike to 21 percent should bring in 700 million euros in 2011 and another 4.2 billion euros in 2013. The overall size of the package will increase to 54.2 billion euros by 2014, the assessment said.

As well as the VAT hike and a 3 percent levy on incomes above 300,000 euros, the already planned start of a gradual increase in the retirement age for women in the private sector will be brought forward to 2014.

The package also includes cuts to central and local government spending, a crackdown on tax evaders including prison sentences for serious offences and measures intended to lower the cost of Italy’s tangled political system.

In addition, the government is planning a constitutional balanced budget amendment but the complicated political process needed to introduce such changes means that any measure could take months or even years.